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New Highs or New Lows – What's Next?

SAN DIEGO (ETFguide.com) - Ring- Ring. Investors got a wake-up
call, but is it serious enough to get out of stocks or can we hit
the snooze button and expect new rally highs or at least stable
prices?

Unfortunately, there's no simple yes or no answer, but we'll get
a better feel of whether stocks are ready to head south for the
summer by looking at various data points, indicators and
gauges.

Spot Top 101

Spotting a market top is tougher than a bottom. Why? The
predominant emotion found at tops is optimism and complacency. The
overriding emotion at bottoms is fear and capitulation.

Fear is a much stronger emotion, often expressed in swift
capitulation moves. Tops, on the other hand, are a process;
therefore the term 'topping process'.

I find bottoms to be easier to call than tops. Even though
calling market bottoms and giving buy signals is ironic for a guy
who's more of a long-term bear, I feel a smidget of pride for
calling the October 4, 2011 and March 6, 2009 bottoms within 2-4
days (buy signals were published in the ETF Profit Strategy
Newsletter and sent to subscribers).

Despite much uncertainty, hunting for market tops is still
worthwhile. Once a top is in place, the ensuing decline tends to
sport a trajectory that's much deeper than most rallies (2010 Flash
Crash and 2011 summer crash).

I use a composite of technicals, seasonality, sentiment and most
importantly, resistance levels, to identify and narrow down a top
in the making.

Targets and Resistance

"The S&P has surpassed the 1,364 - 1,382 resistance range.
This resistance cluster was strong and the break above is bullish.
The next resistance levels are 1,425 and 1,4xx (reserved for
subscribers)," is what the March 16 ETF Profit Strategy Newsletter
said.

The S&P got within a couple of points of 1,425 (April
S&P high was 1,422) before reversing. Resistance at 1,425 was
obviously strong enough to repel the S&P (NYSEArca: SPY), but
since the reversal occurred before actual resistance was hit, it's
prudent to allow at least for the possibility of another attempt to
make new highs.

Technicals

The March 16, ETF Profit Strategy Newsletter brought out that
all but one top since 2007 saw a divergence between RSI and price
on the weekly chart. There was no such divergence back in
March.

Today we see a small but noticeable divergence on the weekly
chart where the S&P (SNP: ^GSPC) did not top until last week
while RSI peaked in mid-March. We see a similar divergence in the
Nasdaq (Nasdaq: ^IXIC) and Dow Jones (DJI: ^DJI).

The divergences are not as pronounced as I'd like to see them,
but they do fulfill the minimum requirement, and with seasonality
turning bearish (who doesn't know about "sell in May, go away"?) it
would be short-sighted not to be prepared for prices to turn
lower.

First, The Topping Process Continues

Tuesday's sell off was a 90% down day, which means that 90% of
all trading volume occurred on the sell side. It's easy to panic
and turn bearish at times like this, but the April 10 ETF Profit
Strategy Newsletter highlighted the stretched condition of the
market (VIX closed higher for 8 consecutive days for the first time
ever) and likened the market to a stretched rubber band that's
ready to snap back. The snap back happened Wednesday and
Thursday.

It is dangerous though, to get too excited about those snap back
rallies. All they may do is create a false sense of security and
prevent investors from selling in time for the next
leg down - the old bait and switch.

Navigating the current ups and downs with support and resistance
levels is (in my humble opinion) the most effective way to stay out
of trouble and identify the next profit opportunity.

As long as stocks remain above support, we will allow for higher
prices, but as soon as stocks drop below resistance, it's time to
buckle down and/or go short.

Support/resistance levels are unique in that they provide
boundaries for stocks. Like in golf, stocks do better as long as
they stay within defined boundaries but get into trouble when out
of bounds.

The
ETF Profit Strategy Newsletter
pinpoints upcoming resistance levels that could stall the recent
bounce and the support level that - once broken - would lead to
much lower prices and quite possibly to a 2010 or 2011-like
meltdown.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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